In China, Nestle and Danone play it by the book

Nestle products are seen at a Nestle research and development center in Shanghai October 18, 2012. REUTERS/Carlos Barria

SHANGHAI (Reuters) - Swift responses from Swiss food company Nestle NESN.VX and French rival Danone (DANO.PA) to Beijing’s announcement that it was investigating possible price-fixing of instant milk formulas are textbook examples of how firms should deal with such crises in China, executives and consultants say.

Just a day after official Chinese media reported the top economic planning agency had launched the probe into six firms, including Nestle and Danone, the two companies said on Wednesday they would cut prices of some instant milk products.

It was not clear how long the companies had known they may become the subject of investigation. But once it became public, they had to respond quickly before negative reports were circulated on Chinese social media, which could harm reputations and sales.

The strategy seems to have worked - there has been limited comment on the subject so far, both in state media and online.

“The media environment here has absolutely changed. Social media has revolutionized what companies do in a crisis situation,” said Kent Kedl, in charge of Greater China and North Asia for risk consultancy firm Control Risks.

“It needs to be taken into account because the chatter out there really creates a voice of its own.”

KFC-parent Yum Brands (YUM.N) came under heavy fire from both mainstream and social media after the official China Central Television (CCTV) reported in late December that some of the chicken supplied to KFC and McDonald’s Corp (MCD.N) contained excess amounts of antiviral drugs and hormones used to accelerate growth.

McDonald’s responded by saying its chicken and raw materials pass through independent, third party tests. Analysts said KFC was dealt a heavier blow because it sold mainly chicken products and its bigger presence in China made it a bigger target.

The company made its first public apology nearly a month after the report but it failed to quell the widespread backlash, which left many KFC outlets in China empty and prompted the company to warn of a drop in profit this year. Yum was not fined by food safety authorities.

In another example, Apple Inc (AAPL.O) came under fire from another CCTV report in mid-March that said Chinese customers were not given the same post-sales service as users in other markets.

Until Apple apologized to Chinese consumers for poor communication over its warranty policy and changed some of the terms nearly a month later, it came under near-daily assault from mainstream media.

CHINA RULES

In contrast, Volkswagen AG (VOWG_p.DE), which in the same CCTV program was criticized for a long-standing gearbox issue, announced just three days later that it would recall vehicles to fix the problem, sparing it from the heavy barrage of negative publicity that hit Apple.

Jack Perkowski, an American who founded one of the first foreign auto parts makers based in the country in 1994, said there was little that companies, both foreign and domestic, could gain by fighting back against the government, including state media.

“Foreign firms have to realize that they don’t set the rules in China. In China, everyone has to play by Chinese rules,” Perkowski, who now heads U.S.-based bank JFP Holdings, told Reuters during a recent visit to Shanghai.

Apple, in its initial response to the CCTV report, said it respected Chinese consumers and that its warranty policies were roughly the same worldwide with specific adjustments to adhere to Chinese law.

However, criticism from state media only intensified following the comment, with even China’s market regulator telling state radio that Apple needed to strengthen supervision of its policies.

Executives and consultants say publicly refuting allegations can be tricky in China and should be only done when proper evidence can be provided.

A China-based executive at a major Japanese carmaker said his company takes even a more cautious approach when the accusation is made directly by the government.

“We would never publicly deny what the government says even if it’s 100 percent wrong,” said the executive who declined to be identified due to the sensitivity of the issue.

“In one case, we simply said ‘no comment’ for the record while we directly spoke with the government on the issue to sort out the misunderstanding.”

Kedl, from Control Risks, said an essential part of crisis management in China was building relationships with various wings of the state before any crisis took place.

“The worst time to have to get to know people in the government is when you are in middle of a crisis,” he said.

“It’s like building an airplane while you’re flying it. It just doesn’t work. If you have relationships, it creates a road for you.”